Audit firms correctly applying ‘going concern’ assessments, says FRC

Out-Law News | 01 Dec 2020 | 9:49 am | 1 min. read

The UK’s Financial Reporting Council (FRC) has found that audit firms have largely applied additional policies and procedures designed to enhance their evaluation of companies’ going concern assessments during the Covid-19 crisis.

In a review of a sample of 11 audits (10 page / 194KB PDF) of the going concern assessments performed by the seven largest UK audit firms, the FRC found auditors had demonstrated an appropriate level of challenge to company boards and management about their key assumptions, stress testing and disclosures in the financial statements.

The FRC said the need for a robust assessment of going concern by auditors continued to be important and firms should continue implementing good practice and focus on specific areas for improvement in forthcoming audits.

The review follows updated guidance issued to companies and auditors in March, a FRC Lab report on going concern, risk and uncertainty and a thematic review of Covid-19 related disclosures in July.

The FRC said some firms had adopted more enhanced consultations than others, such as technical panels, although some audits had insufficient evidence of the consultations that took place. Economic scenarios had been tailored to the circumstances of the companies being audited and the use of reverse stress testing and consideration of other plausible but severe scenarios had helped the auditors’ consideration of potential material uncertainties.

The review showed that in some cases, auditors needed to improve their consideration of the going concern assessment period, which was not always clear. Auditors could also improve their approach to testing the integrity of the forecasting models, the FRC said.

The FRC found that the length of the going concern assessment was not always clear in cases where it went beyond a year. It said auditors should ensure their audit covers the same period as that used by management.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said: “It is interesting to note that the going concern period can be more than 12 months. A year is just the minimum and there may be good reasons why it should be longer, although justification would be needed.

“In addition, reports of audits taking much longer as a result of Covid are borne out, seemingly as a result of new standards and a rapidly changing external environment. In line with the FRC’s Covid-19 related guidance, issued in March 2020, which advised that auditors could consider using the incoming revised standards to help them to carry out their risk assessment, firms clearly decided that this was the time to update their work programmes and internal advice rather than waiting,” Proverbs-Garbett said.